An Evolutionary Approach to
Social Welfare
A person finds a lost purse with a lot of money in it. Ought she try to return it to its
owner or keep it herself ? And even more interestingly, what will she actually do?
According to standard economic theory, a rational person is supposed to maximize her
utility and, at least when unobserved, keep the purse for herself. In reality, however,
most people return the purse although they are unobserved or, at least, they feel uneasy
about not doing so. Evidently, these people share a common attitude towards other
people’s property. In social life, norms and values like this typically help in settling
potential conflicts of interest to the mutual benefit of all.
While not evident immediately, social norms and values also play a crucial role in the
theory of social choice. In the first half of the twentieth century, the special acknowledgement by economic theory of the autonomy of individuals and their subjective
view of the world had led to the serious problem that socially acceptable decisions
could not be made in the absence of unanimity. In this work, social norms and values
are reintroduced to overcome this shortcoming by applying a common standard and,
thus, making individual preferences comparable. In particular, it is shown, how the
adoption of these standards is part of every individual’s social development, how the
standards themselves arose in the course of social evolution and how human beings
were endowned with the necessary learning mechanism by Darwinian evolution in the
first place.
This impressive, unique book is well informed and clearly written. It will be of great
interest to all those students, academics and researchers who are interested in evolutionary economics and social welfare as well as social psychology, evolutionary biology
and philosophy.
After a short career as a biologist, including a PhD in biochemistry (1987) and postdoctoral work in molecular biology, Christian Sartorius was prompted to study
economics by his concern for the environment and his interest in the causes of its
increasing deterioration. His work includes many aspects of sustainability, from the
role of energy in the economic process to time strategies in sustainable innovation
policy and, in the present book, the changing of social preferences and the contribution of social preferences to the avoidance of mutual exploitation – work
that yielded him a PhD in economics (2001).
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51 An Evolutionary Approach to Social Welfare
Christian Sartorius
An Evolutionary
Approach to Social
Welfare
Christian Sartorius
First published 2003
by Routledge
11 New Fetter Lane, London EC4P 4EE
Simultaneously published in the USA and Canada
by Routledge
29 West 35th Street, New York, NY 10001
Routledge is an imprint of the Taylor & Francis Group
© 2003 Christian Sartorius
Typeset in Baskerville by Taylor & Francis Ltd
Printed and bound in Great Britain by Antony Rowe Ltd,
Chippenham, Wiltshire
All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic,
mechanical, or other means, now known or hereafter
invented, including photocopying and recording, or in any
information storage or retrieval system, without permission in
writing from the publishers.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
(Data to follow)
ISBN 0–415–28184–9
To Ingrid, Hanna, and Philipp
Contents
Illustrations
Preface
Introduction
1.1
1.2
1.3
1.4
1.5
The need for a new approach to social welfare
From utilitarianism to positivist subjectivism
Preference orderings and social choice
Justice, empathy, and the ‘veil of ignorance’
A positive theory of social welfare
xiv
xv
1
1
4
12
17
23
PART I
Evolution, behavior, and learning
27
2
Evolution and learning – the rise of behavioral plasticity
29
2.1
2.2
2.3
2.4
2.5
30
32
35
39
41
3
Learning and man’s success in evolution
From inherited to learned behavior
Behaviorist approaches to learning
Restrictions on the potentiality to learn
Cognitive sciences and learning
Motivation and well-being
51
3.1
3.2
3.3
3.4
3.5
52
56
57
59
62
Drives and needs
Drives and instincts
Fear and learned drives
Drives and incentives: push versus pull
Drive for cognition – what makes us think?
xii
4
Contents
3.6 Drives and desires – an instrumental relationship
3.7 Habits – between drives and desires
3.8 Reason and wants – the empiricist philosopher’s view
3.9 Emotions – amplifiers of drives and origin of commitment
3.10 Conflicts between motivations
3.11 Motivation and hedonism
3.12 Motivation and well-being – a conclusion
64
67
70
75
82
85
90
Propagation of behavioral determinants
92
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
Natural selection and genes
Genes as replicators
Natural selection and adaptation
Learning and memes
Sociobiology and the relevance of memes
The functioning of memes in evolution
Two kinds of memes
Three kinds of replicators
The interaction of replicators
Conclusion
93
96
97
102
104
107
123
125
127
132
PART II
Coordination, cooperation, and social welfare
5
135
The significance of the group for the evolution of
order and cooperation
137
5.1 Coordination
5.2 Cooperation
5.3 Altruism and group-level selection in biology
5.4 Rationality and commitment in economics
5.5 Cooperation and social learning
5.6 Cooperation and economic institutions
5.7 Group selection and ‘spontaneous order’
5.8 The functional principles of social group selection
5.9 Fitness in the context of social group selection
5.10 Social group selection – some evidence
5.11 Adaptiveness of social group selection
5.12 Conclusions
138
142
144
148
153
158
162
166
170
173
179
181
Contents xiii
6
7
Welfare and evolution
182
6.1
6.2
6.3
6.4
6.5
6.6
6.7
183
185
189
191
199
205
210
Cardinal utility and interpersonal comparability
Interpersonal comparison – empathy and moral principles
Social welfare versus individual well-being
Welfare comparison across cultures? – The role of subjective well-being
The evolution of welfare
The normative approach to meta-criteria of welfare
Conclusions
Conclusions
Notes
References
Index
212
220
228
240
Ilustrations
Figures
2.1
2.2
2.3
2.4
3.1
3.2
4.1
4.2
4.3
5.1
5.2
5.3
5.4
5.5
Classical conditioning
Operant conditioning
Steps to recognition by evaluating visual information
A network of propositions
The hierarchy of driving forces motivating human action
Structural and funcitonal components of emotions within
the brain
Schematic compariosn of the evolution of genes and memes
Schematic representation of the interaction between genes
and memes
The interaction of the replicators ‘genes’, ‘norms and values’,
and ‘hypotheses’ in forming human behavior
Payoff matrix of the coordination game
Payoff matrix of the prisoner’s dilemma game
The ‘threat’ game
The effect of emotions and dissonance avoidance on the
respective payoff matrices of the former prisoner’s dilemma
and threat game
Characterizing of ethnocentrism according to Levine and
Campbell (1972)
36
37
44
48
66
79
110
112
128
139
143
152
155
170
Preface
For every scholar of economics, the term ‘social welfare’ immediately provokes
associations with concepts like ‘subjective utility,’ ‘ordinal measurability,’ ‘interpersonal comparability’ and so on – all of them culminating in Arrow’s
‘impossibility theorem’. At the same time, all these terms characterize key points
in the history of economics. In each case, economics faced a trade-off between
being overly normative and suffering from chronic deficits in terms of measurability. For the sake of its reputation as a science and despite the difficulties
associated with this approach, mainstream economics decided in favor of the
latter – at the price of a loss of much of its relevance and straightforwardness
with regard to the social aspects of any economy. Due to the lack of appropriate
experimental and analytical skills available in the earlier parts of the twentieth
century, the reliance on revealed preferences in empirical terms and the exclusively axiomatic treatment of the latter in theory rendered preferences a black
box the opening of which was, and still is, considered inopportune in most
branches of economics.
The presumption of fixed and mutually independent individual preferences is
unproblematic as long as it is used for the explanation of short-run events not
giving rise to major conflicts of distribution. The same presumption, however, is
completely inappropriate whenever individual behavior cannot be explained in
terms of a simple maximization of material outcome – especially in all instances
of cooperation and social justice. In order to explain these issues, it is necessary
to distinguish analytically between different types of utility, to open the black box
of human preferences, and to reveal the sources of just and fair as well as selfish
behavior. Moreover, the fact that the principles of fairness and justice employed
in different cultural contexts can vary widely, and even change in the course of
time, needs to be accounted for. It is evident that theory formation in this context
must not be based on speculation and cheap talk.
Fortunately, since the mid-twentieth century, learning theories in psychology
and the cognitive sciences have made great advances in explaining and differentiating different ways in which humans can adapt their behavior to changing
conditions. More specifically, social learning theory showed how the formation of
habits and beliefs sufficiently reduces the complexity of the environment to allow
for the formation of reliable expectations on the part of the individuals. During
xvi Preface
the same period, economists and biologists working in the field of evolutionary
game theory analyzed altruistic or cooperative behavior and specified possible
conditions under which such socially beneficial behavior may prevail and persist.
Cultural anthropologists extended this work by extending and adapting these
conditions to real social communities and providing the empirical background
for the confirmation of these theories.
The preceding enumeration of theories is of course highly selective. At the
same time, it gives no advice as to how these pieces are to be integrated. What
the selection shows, however, is the diversity of approaches that will be used in
the synthesis to follow. An Evolutionary Approach to Social Welfare will indeed
be a truly interdisciplinary approach. And, in order to prosper, such an approach
needs a supporting environment.
The Evolutionary Economics Group of the Max Planck Institute for
Research into Economic Systems in Jena (Germany) indeed provided the best
conditions under which this project could have been undertaken. Most importantly, only few institutions would have been willing to spend resources on a
subject as heterodox as this in the first place. In this respect, I was lucky to meet
Professor Dr Ulrich Witt, the group’s director and (at that time) director of the
institute, for whom the reintegration of the dynamics and change of human
preferences into the theoretical underpinnings of economics always represented
an important challenge. Even a well-endowed place as this, however, would be of
little use if it was lacking the atmosphere of mental support and inspiration
necessary to successfully approach a subject as complex as this. Remarkably, the
list of qualifications of the group members reads as if it were especially designed
for this work: psychology, biology, physics, mathematics, law and, of course,
economics. While many discussions with all of these people were a great help, I
would like to express my special gratitude to Dr Guido Bünstorf, Dr Silke StahlRolf, Dr Thomas Brenner and Professor Witt for reading and commenting on
major parts of this book. In addition, I greatly benefited from presenting the
results of my studies at various workshops and conferences. Without mentioning
them in detail I am indebted to all colleagues who discussed with me diverse
aspects of my work, and thus gave me the opportunity to sharpen my arguments
and, eventually, render this book more concise and more easily readable.
Last but not least, the most thorough comments on the work as a whole came
from Professor Dr Rolf Walter and, once again, Professor Witt, who allowed me
to submit this work as a thesis for a PhD in economics from the University of
Jena.
While this work benefited in various forms from all kinds of comments, it
does not need to be emphasized that all remaining errors are mine.
Christian Sartorius
Jena, December 2002
1
1.1
Introduction
The need for a new approach to social welfare
Since ancient times humans, and philosophers in particular, have been
concerned with the forces moving the universe and with the potential of human
beings to interfere with them. With regard to prevailing social and religious goals,
this potential could subsequently be used to derive normative conclusions
concerning the behavior of members of the respective groups. Inspired by the
Enlightenment movement, human reason was granted a new role as the eminent
means by which man could understand the universe and improve his condition. A
prominent example for this change of mentality is presented in Thomas Hobbes’s
(1651) Leviathan: while once the state had been viewed as an earthly approximation
of the eternal order, with the city of man modeled on the city of God, now it
came to be seen as a mutually beneficial arrangement – the social contract – among
men aimed at protecting the natural rights and self-interest of each. Coinciding
with the end of absolutism and feudalism, and with the beginning of the Industrial
Revolution, this emphasis on man’s own faculties and responsibility to further his
survival and well-being called for new accounts of political and economic reality
and for new visions. In The Wealth of Nations (1776), Adam Smith provided the first
major account of this kind: essentially, he describes industrialization as a prominent case of division of labor which allows for a dramatic increase in productivity
and, thus, wealth. For this to happen the existence of property rights and of competitive
markets is the only, but crucial, prerequisite. (Any further intervention of the state is
even considered detrimental.) Without protection of private property, the necessary accumulation of capital would not take place, while markets are needed to
exchange products in so far as they exceed the manufacturers’ own demand. By
ensuring that supply largely matches demand, competition turns the persistent
human desire for improving one’s condition into a socially beneficial agency by
pitting one person’s drive for self-betterment against another’s. It is this regulation
of the economy as the unintended outcome of the competitive struggle for selfbetterment to which the metaphor of the ‘invisible hand’ alludes.
While The Wealth of Nations is no doubt a masterpiece of economic analysis, its
political implications are not completely unambiguous. Superficially, the prospect
of a prospering economy is very promising – especially against the backdrop of
2
An Evolutionary approach to social welfare
the majority of the population living in miserable conditions: the state just has to
reduce, or give up, the major part of its interventions within the economy and
enforce a few very essential institutions, and soon all people will succeed in
improving their lot – guided solely by the ‘invisible hand.’1 Since there seem to
be winners only, all measures leading to such an economy should find unanimous support. However, closer inspection reveals that, in fact, there are
numerous losers as well. First, it may safely be assumed that at least some people
– for instance, the holders of privileges in pre-industrial societies or the beneficiaries of the absence of institutions protecting private property – will find
themselves benefiting from the old regime more than from the new. Second, the
benefit a single person may draw from this change turns out to differ widely.
Some people may become very rich while others earn just enough to sustain
their own or their families’ lives and may not even have better prospects. For the
first time, this aspect of income, or welfare, distribution became a matter of
rigorous investigation in the influential works of David Ricardo (1817) and John
Stuart Mill (1848). A third source of potential loss, even in a prospering
economy, refers to the crucial role of competition. Joseph Schumpeter (1942)
was among the first scholars to explicitly acknowledge the crucial role of innovative activities for the remarkable performance of capitalist economies. By his
famous notion of ‘creative destruction,’ at the same time, he points out that
every innovation carries in itself the potential to devalue existing productive or
human capital. Thus, in order for the majority of people to benefit from the
innovation-induced growth of their economy, some individuals have to incur
some losses in terms of decreasing salaries,2 losing their jobs or their companies
going bankrupt. Due to the fundamental uncertainty concerning the nature of
the innovation, it is impossible to predict who will have to suffer and by how
much. It is clear, however, that some people will face substantial costs. Moreover,
their willingness to bear these costs is a necessary prerequisite for all people to
benefit from the resulting economic growth.
While this list is certainly not exhaustive, it shows some of the major reasons
as to why, even in a growing economy, a significant number of people will incur
substantial losses. For the individuals concerned, their condition will in no way
improve by their knowing that for the whole of society gains by far outweigh
losses. On the contrary, from the purely individual perspective, it is even quite
plausible that the divergence between their own misfortune and other people’s
good fortune should make them perceive their own situation as even worse. For
this reason, accounting for relative changes in individual well-being should be
expected to play an important role in the assessment of welfare as yielded by a
given state of or change within an economy. However, while the complexity of
the interactions and, thus, the individuals’ mutual influences on their respective
well-being increased constantly over the last centuries, economists seemed to be
unable to account for this change by the development of effective procedures for
the aggregation of social welfare from individual well-being. The history of
economic thought – from utilitarianism to social choice theory – even testifies to
a rising uneasiness and incapability of dealing with the problem of interpersonal
Introduction 3
comparisons of well-being, eventually culminating in Arrow’s (1951) impossibility
theorem. While summarizing the latter development, sections 1.2 and 1.3 also
allow for the identification of two of its major causes. First, from the methodological perspective, there is a marked tendency to render the individual the
central unit of analysis. Moreover, while with the rise of subjectivism the individual is granted complete autonomy over her decisions and actions, the
interdependence of different individuals’ decisions and of the preferences on
which these decisions are based – that is, the social influence on them – is basically rejected. This closely relates to the second point, that questions of
allocation are clearly given priority over questions concerning the distribution of
goods. While the allocation of goods according to individual preferences is far
from being a trivial problem, there is at least no need for the invocation of
normative assumptions that could not easily be shared by a large majority of
humans: efficient allocation in the sense that, for a given set of individuals,
maximum total utility is derived from the suitable allocation of a given set of
goods is generally considered as a positive contribution to welfare. The latter
argument can obviously not be maintained for most questions of distribution.
Stances as different as capitalism and egalitarianism are cases in point. While
most people basically accept a worsening of their personal situation as long as
the realized costs appear to be sufficiently small, temporary in nature, and the
chance of being compensated for them by future gains seems to be realistic, the
extent and the quality of tolerated divergence of living conditions varies widely
between cultures. The latter fact may indeed appear somewhat discouraging for
an economist trying to develop a (general) theory that describes the contribution
of states or changes of distribution within a group to the welfare of this group.
Nevertheless, for people belonging to a specific cultural context, these figures
are often characterized by a high degree of homogeneity. The latter fact appears
less surprising once the mutual interaction between the members of a given
group is recognized as giving rise to their reasonable expectation that personal
misfortune does not last forever but, rather, is a kind of precondition for the
potential rise of good luck. It is the nature of this social contract that people feel
committed to it as long as the incurred burden consistently relates to the potential benefits to be realized. Evidently, the social values underlying and
constituting a social contract could easily serve as measures for at least culturally
specific comparisons of costs and benefits incurred by different members of the
same society. Why, one is tempted to ask, didn’t economists make use of it as a
natural means for the interpersonal comparison of well-being and for the aggregation of individual well-being to social welfare? The answer, again, is twofold
and relates to what was said above. First, without being able to explain how
different societies arrive at their respective sets of social values or normative
principles, it would be impossible to develop more than just a series of culturespecific theories, each of them based on a unique set of normative assumptions
not shared by the members of all other societies. Moreover, being an emergent
property of the interaction of the members of a community, the social values
underlying any social contract can be assessed only with difficulties even greater
4
An Evolutionary approach to social welfare
than those that already led to the rejection of introspection and the adoption of
subjectivism and revealed preferences as the guiding methodological principles
in economics. Utilitarianism and John Rawls’s (1971) Theory of Justice are typical
examples of theories hampered by exactly the latter two kinds of problems.
Section 1.4 will elaborate on the fundamentals of interpersonal comparisons of
well-being and on the way in which these fundamentals are reflected in two of
the best-known principles underlying the aggregation of social welfare.
Social welfare and its reconstruction from individual well-being will of course
be the core issues of the work to follow. However, inspired by the conclusions
drawn from the understanding gained in sections 1.2 to 1.4, the approach
employed in this work will differ markedly from most, if not all, other
approaches to this subject. First, social interaction and interdependence will be
acknowledged as a necessary precondition for the interpersonal comparison of
well-being and, thus, for the aggregation of social welfare. However, it will also
be acknowledged that drawing on specific normative assumptions will never give
rise to a generally accepted theory. Obviously, the two conclusions appear to be
at least to some extent contradictory. How can this contradiction be resolved and
the two conclusions reconciled? The key to the solution of this problem relates to
the conjecture that different societies employing their respective sets of norms
and social values do not coexist independently. Rather, it will be presumed that
groups or societies have to compete for a given set of resources and that the sets
of norms and values they hold influences their respective probability to prevail
or to be displaced – with obvious consequences for the welfare in the respective
groups. A more detailed outline of this evolutionary approach to social welfare is
provided in section 1.5. Most remarkably, this approach is a positive approach:
Instead of relying on social norms and values as specific normative assumptions
underlying the analysis of every single social context, it includes social norms
and values as variables that explicitly influence their holders’ welfare. Doing so, it
includes distributive effects in social welfare and, at the same time, bridges the
gap between different groups.
1.2
From utilitarianism to positivist subjectivism
Once – in the course of the Enlightenment – man had come to believe that
human reason was supposed to play the most eminent role as a means to the
understanding and control of his environment and, thus, to the improvement of
his condition, he also needed a moral guideline telling him to which ends these
means were to be directed. This guideline was provided by utilitarianism and
Jeremy Bentham as its leading proponent. Basically, Bentham believed that the
maximization of pleasure and the minimization of pain are the driving forces
and determinants of human action. Here, pain could also be interpreted as a
sanction imposed by another agent intending to influence one’s own action.
Moreover, he regarded pleasure-seeking and pain-avoidance as the basis for a
normative criterion for human behavior. In contrast to other, particularly earlier,
ethical theories, utilitarians are consequentialists; that is, they focus upon the
Introduction 5
consequences of an individual’s action rather than upon its intrinsic value or upon
the motives of the agent. It is also important that the emphasis on pleasureseeking and pain-avoidance does not imply egoism, the view that a person
should pursue her own (narrow) self-interest even at the expense of others. The
hedonic calculus employed by utilitarians included – and had to do so, from their
perspective – the pleasure and pain of everyone likely to be affected by a given
act. This logic immediately becomes evident as underlying Bentham’s (1789)
Introduction to the Principles of Morals and Legislation: a legislator seeking to maximize
the happiness of the whole community could make it unprofitable for one
person to harm another by laying down certain penalties for different acts and,
as an effect, by creating an identity of interest between both parties. Altogether,
the calculus was supposed to yield the ‘greatest pleasure of the greatest number.’
For Bentham, pleasures and pains, of course, were of various kinds and
different in quality, so much so that he invested considerable effort in their classification (1789: ch. 5). As Warke (2000: 8–11) shows, the use of the term ‘utility’
(which he adopted from Hume) for Bentham implied irreducible multidimensionality. Moreover, he basically assumed that the perception of pleasures or
pains belonging to the same category differs among individuals. As a consequence, aggregate utility for a group of n persons each experiencing m different
types of pleasure and pain results in an object expanding in an nxm-dimensional
space. According to the ‘index number problem,’ it is impossible to derive a
ranking or a general measuring rod for the valuation of a series of states that
differ in more than one independent quality. Thus, in order to arrive at a decision relevant for the entire group, nxm different expressions of pleasure or pain
have to be reduced to a single value, the aggregate utility, by employing some
intrapersonal (over all m) and interpersonal (over all n) utility weights. As to the
latter part of the problem, Bentham, who used to distinguish thirty-two circumstances (such as age, sex, and education) influencing the individual’s sensibility in
terms of pleasure and pain (1789: ch. 6), was well aware of the difficulties raised
by the attempt to assess and to compare the utilities of persons that differ in so
many respects. He therefore ruled out all empirical problems by adopting an
ethical assumption, that is, by imposing a strictly egalitarian rule that became the
standard assumption shared by all modern utilitarians: ‘Everybody to count for
one, nobody for more than one’ (Bentham 1827, as quoted in Warke 2000: fn. 8).
As a consequence, the suitable weights on every individual’s utility for making
ethical judgements or legislative enactments are equal across all individuals
concerned. With regard to intrapersonal comparison of utility, the situation is
more difficult – and this is why, for Bentham, the distinction between different
qualities of happiness is a crucial one: assuming equivalence between different
sources of happiness, utilitarians would have to accept even malevolent behavior
if the pleasure drawn from the malevolent act by the perpetrator exceeded the
pain suffered by the victim. Only the distinction between different qualities of
happiness makes it possible to specifically impose sanctions to suppress one (e.g.
mischievousness or malicious glee) kind of happiness as opposed to another. But
even this possibility rests on the assumption that their relative expressions within
6
An Evolutionary approach to social welfare
the average individual can be determined in terms of average weights. Just this
act of determination, however, relies on the subjective perception of individuals
such that even strictly impartial utilitarians could be expected to arrive at
different conclusions concerning representative weights for various pleasures and
pains. Obviously, Bentham was aware of this problem; while he even proposed
‘the faintest of any [sensation] that can be distinguished’ (Bentham 1782 as
quoted in Warke 2000: 11) to represent a kind of unit of intensity, he frankly
acknowledged that measurements of and in terms of these units must remain
imprecise. Contrary to common opinion, Bentham did not believe that either
aggregate or individual utility could be measured precisely; he did not use these
concepts except for qualitative investigation.
In economics, the half century following the 1860s was characterized by a
major change in the understanding of value – from the classical ‘labor theory of
value’ to the neoclassical notion of marginal utility. While classical economists were
quite aware of the phenomenon later known as decreasing marginal utility (see
Stigler 1950: 310), they had as yet been incapable of using this notion to reconcile
the utility derived from the consumption of a good with the demand for it and its
market price. This changed significantly after William Stanley Jevons (1871), Carl
Menger (1871), and Léon Walras (1874) marked the outset of the ‘marginalist
revolution’ with the almost simultaneous, and independent, publication of their
books. Together with constrained maximization, marginal utility called for formal
analysis and, thereby, for a one-dimensional variable as the basis for algebraic
operations. Among the three marginalists mentioned above, Jevons was most
explicit about the concept of utility he applied. He thereby adopted a kind of
intermediate position between the classical conception and the view adopted by
other neoclassical economists: as Warke (2000: 12) concludes, ‘Jevons, an ardent
admirer of Bentham, accepted as definitive these same elements of value, yet
managed to measure in a determinate single dimension the utility flow from an act
of consumption.’ In Jevons’s (1871) own words this transition manifests itself as
follows: adopting the Benthamite perspective, ‘utility must be considered as
measured by, or even as actually identical with, the addition made to a person’s
happiness. It is a convenient name for the aggregate of the favourable balance of
feeling produced – the sum of the pleasure created and the pain prevented’ (Jevons
1871: 53f). When, however, it comes to economic calculus:
it is convenient to transfer our attention as soon as possible to the physical
objects or actions which are the sources to us of pleasures and pains [… and
to] employ the word utility to denote the abstract quality whereby an object
serves our purposes and becomes entitled to rank as a commodity.
(Jevons 1871: 44f)
Jevons avoided the problems arising from weighing various components of utility
by associating with each type of commodity consumed only a single kind of pleasure. Moreover, for the consumption of different kinds of goods he considered all
pleasures as homogeneous.
Introduction 7
While one-dimensional homogeneous utility may be suitable for the solution
of simple economic problems relating to the consumption of ordinary goods, it
is not sufficient for providing answers to ethical questions. As we may recall, this
was the major reason for Bentham to develop his taxonomy of pleasures and
pains. Since Jevons was nevertheless concerned with moral issues, he had to use
a different approach: to account for the possibility that utility may be drawn
from doing one’s duty as well as from consuming an ordinary good, and to rule
out the case that the latter may exceed the former and that, thus, the person
could be allowed to give her consumption priority over her duties, he introduced
a two-level lexicographical utility scale. He assumed a ‘lower calculus’ that after
incurring a given cost (e.g. in terms of labor) allows people to satisfy their ordinary, self-directed wants and desires to the largest extent possible, and thus to
accumulate wealth. At the same time, a ‘higher calculus’ determining moral
right and wrong would indicate how this wealth and the corresponding costs are
to be divided among all members of the society (Jevons 1871: 32). It is the most
convenient property of this lexicographic approach that by simply assuming
‘moral indifference’ for a given situation, normative questions can easily be faded
out.
This leads to a third aspect of welfare in which Jevons departed significantly
from Bentham: decisions of social relevance usually require a balancing of the
individual contributions to that decision. In the context of moral decisions, both
Bentham and Jevons assumed a kind of natural (= innate) inclination that made
people comply with given moral rules. While these rules may not be identical for
all persons belonging to a given community, there will be a given set of rules for
any person, and, as a rule, the (higher) utility calculus will turn out to make
people obey the rules regardless of other, private, preferences. This is different
with regard to ordinary decisions related to consumption, for instance. Bentham,
though assuming a certain degree of variability of individual susceptibility,
adopted the egalitarian stance and deliberately set all utilities equal. In contrast,
for Jevons, these differences of susceptibility and the empirical problem of scrutinizing another person’s mind and of assessing her utility are sufficient reason to
repudiate interpersonal utility weights.
Evidently, Jevons’s conception of utility was the result of an almost painful
attempt to reconcile his utilitarian persuasion with the practical needs related to
his scholarly endeavors. But the need for accessibility to mathematical operations
was not the only cause for the change in the meaning of utility. Another cause
was a difference in perspective. While Jevons was concerned with utility as the
net happiness the individual could derive from consumption of a commodity,
Walras and Menger focused more on exchange and on market phenomena. For
example, Menger (1871) – who even refused to state his theory in mathematical
terms – developed a theory showing how an individual would try to satisfy her
subjectively felt needs most efficiently. Since immediate consumption does not
play the only role, he distinguishes between use-value and exchange-value. Both
terms, with similar connotations, had already been used by Adam Smith (1776)
8
An Evolutionary approach to social welfare
but, at that time, led to major confusion concerning the relation between value
and happiness. Menger resolves this problem by defining use-value as:
the importance that goods acquire for us because they directly assure us the
satisfaction of needs that would not be provided for if we did not have the
goods at our command. Exchange-value is the importance that goods acquire
for us because their possession assures the same result indirectly.
(Menger 1871: 228)
While Menger used the term ‘utility’ more in conjunction with use-value, he did
not take both terms as synonyms; rather he regarded utility as an abstract relation
between a specific kind of good and a human need. In contrast to Jevons who
rejected (but, nevertheless, made use of) interpersonal comparisons of well-being,
Menger and Walras seemed to find no difficulty with it (Black 1987: 777f).
By 1890, with the appearance of Alfred Marshall’s Principles of Economics, the
analysis of consumer behavior had resulted in a theory that effectively integrated
exchange, or market, value with the analysis of supply and cost that served to
explain long-run use-value. As Edgeworth (1899: 602, quoted in Black 1987: 778)
concludes:
the relation of utility to value, which exercised the older economists, is thus
simply explained by the mathematical school. The value in use of a certain
quantity of commodity corresponds to its total utility; the value in
exchange to its marginal utility (multiplied by the quantity).
Accordingly, taking income as an equivalent to use-value and market prices as
equivalents to exchange-values, one obviously arrives at a perfectly cardinal
measure of utility. At least in the early editions of his Principles of Economics,
Marshall fully accepted this idea. Moreover, he also accepted interpersonal
comparisons of utility (Black 1987: 778). He maintained the latter view even after
the utility theory of value gradually gave way to a preference perspective (see p. 11):
If the desires to secure either of two pleasures will induce people in similar
circumstances each to do just an hour extra-work, or will induce men in the
same rank of life and with the same means each to pay a shilling for it; we
then may say that those pleasures are equal for our purposes, because the
desires for them are equally strong incentives to action.
(Marshall 1920: 16)
According to the demand theory developed by Marshall and his predecessors,
satisfaction of consumer wants was the major aim of the economic system. If the
satisfaction of consumer wants was now interpreted as the maximization of utility
and since, additionally, some measures for the interpersonal aggregation of total
utility were available, it was only natural to expand the function of economics
from the mere understanding of cause and effect to the judgement as to whether,
Introduction 9
from the want satisfaction perspective, certain effects are desirable or undesirable. This was, indeed, the project undertaken by Arthur Cecil Pigou in his
Economics of Welfare (1920). Making the assumption that aggregate real income
was the appropriate objective measure of economic welfare, he basically argued
that economic welfare was the greater: (1) the larger the increase of aggregate
real income, (2) the lower the extent of its fluctuations, and (3) the more equally
this income was distributed among the people constituting this economy (Black
1987: 778). Pigou also realized that the consumption of many goods causes
negative or positive external effects which, in turn, lead to a consumption level
for these goods which is unequal to what could be viewed socially desirable. In
order to correct for the socially negative effects, he proposes taxes or subsidies
that make prices of goods include the costs or benefits imposed on people other
than the consumer. Although prices and income are indeed objective measures
that are even closely related to human well-being or happiness, it has to be realized that employing these measures the way Pigou does includes a value
judgement: even if price or a given income are equal for different people in
terms of money, they are most probably not equivalent with regard to the happiness they induce in these people. Whether one, regardless of all practical
problems involved, prefers to treat each person on the basis of the specific feelings caused by her consumption of any given good, or whether one, as with
Bentham, prefers to treat all people as if they were equally affected, is not a
matter of true or false but is a question of one’s moral stance. By 1930, the fact
that the validity and appreciation of economic analysis was to depend on mere
conviction on the part of the respective recipient made most economists become
more and more uncomfortable with the idea of measurement and interpersonal
comparison of utility. Fortunately, by that time, another branch of development
within marginalist economics had become quite promising with regard to a resolution of this problem.
The founders of marginal utility theory, Jevons, Walras, and Menger, assigned
one utility function to each of the goods when analyzing the utility yielded by a
set of goods. In order to maximize aggregate utility subject to a given income
constraint, it was, by then, sufficient that marginal utility was decreasing for any
single function. For Francis Edgeworth (1881), this separation of utilities
resulting from different sources was not only counterintuitive; it also hampered
mathematical generalization. He therefore substituted a total utility function for
the former additive function but then had to realize that diminishing marginal
utilities were neither necessary nor sufficient for yielding convex indifference
curves which, in turn, were considered a necessary prerequisite to allow for the
maximization of satisfaction. As it turned out, it was much easier to specify the
conditions yielding a market equilibrium and, as a consequence, maximum
utility for a set of commodities by means of indifference curves than by means of
complete utility functions. Moreover, only indifference curves allowed for the
geometrical analysis of the interaction of different, in this case two, goods in
terms of general utility by portraying them in two dimensions (Stigler 1950:
322–5). The most important argument in favor of indifference curves, however,
10
An Evolutionary approach to social welfare
was made by Irving Fisher (1892): it is possible to determine experimentally the
utility derived from the first, then the second, the third, … unit of one
commodity (say cubic inches of milk) in terms of a given unit of another
commodity (say the first slice of a loaf of bread). It is easy to calculate from this
total as well as marginal utilities. The same procedure can be used to determine
the (total as well as marginal) utility of milk in terms of another commodity (say
beer). As it turned out from actual experiment, the utility curve of milk in terms
of beer looked quite different from that of milk in terms of bread. They differed
not just by a proportional factor but also with regard to the curve’s shape. From
this, Fisher drew the conclusion that any attempt to derive the total utility of a
commodity by means of such a procedure would give rise to inconsistent results.
Accordingly, it would not only be unnecessary but even entirely misleading to try
to explain the reactions of consumers to changes in prices or income in terms of
total utility (see Stigler 1950: 378f). For the latter purpose, obviously, neither
interpersonal nor intrapersonal comparisons of utility are essential or, as Fisher
(1892: 89) puts it,
if we seek only the causation of the objective facts of prices and commodity distribution four attributes of utility as a quantity are entirely unessential, (1) that
one man’s utility can be compared to another’s, (2) that for the same individual the marginal utilities at one consumption-combination can be
compared with those at another, or at one time with another […].
A similar argument was developed by Vilfredo Pareto in his Manuale di economia
politica (1906).
As George Stigler (1950) demonstrated in his review article, the idea that
utility was not measurable in absolute terms – that is, that utility was not cardinal
– was not readily adopted by contemporaneous economists. He gives Marshall as
a good example as to how the attitude towards specific notions changed over
time: as was already demonstrated above, Marshall was at first uncritical with
regard to the measurability of utility and to interpersonal comparison of utility.
Then, Marshall showed increasing
caution and reticence in this area. He became unwilling to attribute precision to interpersonal comparisons. The discussion of consumer surplus
bec[ame] increasingly defensive. Probably because of the growing criticism
of hedonism, many terminological changes [we]re made: ‘benefit’ for ‘pleasure’; ‘satisfaction’ for ‘utility’; etc. Bentham’s dimensions of pleasure were
approved at first; they los[t] their sponsor and place in text. The distinction
between desires and realized satisfactions bec[ame] prominent.
(Stigler 1950: 383f)
In 1925, Jacob Viner noted that, while (cardinal) utility theory played an
important role and was sympathetically treated in the authoritative treatises on
economic theory of that time, in scientific periodicals sympathetic expositions of
Introduction 11
the utility theory of value had become rare and a series of slashing criticisms of
utility economics could be found. The economists’ increasing uneasiness with the
apparent involvement of utility theory with hedonic psychology and with the
problems of measuring welfare in terms of utility culminated in Lionel Robbins’s
(1932) straight rejection of interpersonal comparisons of well-being as unscientific and, therefore, not meeting the claim of economics as a science. Finally, the
last remainders of psychologically based behavioral assumptions were eliminated
from neoclassical economics by Paul Samuelson’s (1938) introduction to the
theory of revealed preferences. Accordingly, consumer behavior was determined by a
series of axioms which simply postulate the assumption that, broadly speaking, a
(rational) individual always tends to maximize her utility function and that she
will successfully achieve this aim by preferring the better over the worse. That is
to say, a (rational) person who is given the choice between a series of alternatives
will choose that alternative which is at least as good as any of the other alternatives. As a consequence, economists did not need to care about the consumer’s
psychic motivation but rather had to find plausible and consistent arguments as
to why the individual, indeed, derived at least as much utility from the alternative she chose than from the one she did not.3 This tendency to substitute
objectively measurable observation for subjective and, therefore, rather unreliable introspection reflected an increasingly influential movement in economics
that eventually became known as positivist subjectivism. We can summarize this
section with Samuelson (1947: 90f):
The concept of utility may be said to have been undergoing throughout its
entire history a purging out of objectionable, and sometimes unnecessary,
connotations. […] One clearly delineated drift in the literature has been a
steady tendency towards the rejection of utilitarian, ethical, and welfare
connotations of the Bentham, Sidgwick, Edgeworth variety. […]
Concomitantly, there has been a shift in emphasis away from physiological
and psychological hedonistic, introspective aspects of utility. [… M]any
writers have ceased to believe in the existence of any introspective magnitude or quantity of a cardinal, numerical kind. With this skepticism has
come the recognition that cardinal measure of utility is in any case unnecessary; that only an ordinal preference, involving ‘more’ or ‘less’ but not ‘how
much’, is needed for the analysis of consumer’s behavior.
It is important to recognize the remarkable change in the meaning of utility
from Bentham to Samuelson. For Bentham, utility was equivalent to the satisfaction of human needs and wants. They formed the motivation for human action.
Thus, preferences as revealed by the choice of an individual would have to be
interpreted as the effect and utility as their cause. For positivist subjectivists, this
order is exactly the reverse: now preferences are regarded as cause giving rise to
all individual choices while utility plays a role as a mere mathematical function
summarizing the effect of the respective action. Neoclassical economists had
provoked and undertaken this change because it allowed them to realize at least
12
An Evolutionary approach to social welfare
three major advantages: (1) the abandonment of a multitude of qualities with
regard to the utility allowed for a much more stringent and concise treatment of
at least some of the problems investigated by economics. Warke (2000: 6) characterizes this effect as an increase in ‘fitness for mathematical analysis’ while in
Stigler’s (1950: 393) terms, it improves ‘manageability’. (2) Substitution of
ordinal relations for cardinal measures accounted for the more practical impossibility of uniquely integrating marginal utility functions, while (3) the
relinquishment of interpersonal utility comparisons released them from the
necessity of making normative assumptions. The latter two points could be interpreted with Stigler (1950: 393) as an increase in ‘generality,’ that is, reaching a
given conclusion with weaker assumptions. However the latter judgment cannot
be accepted except with serious constraints: in order to relax the assumptions
concerning intrapersonal and interpersonal comparisons of utility, they had to
be substituted for by the well-known axioms to be satisfied by a preference
ordering. According to Witt (2000), none of these assumptions are easily acceptable: insatiability and continuity (which exclude lexicographical preferences) are
empirically unsettled material hypotheses; completeness is valid only for small
subsets of all potential alternatives; transitivity applies only for most, but not all,
observed choices; reflexivity and convexity are mere idealizations. Furthermore,
they abstain from the problems of uncertainty and quality. And, finally, even
Samuelson (1947: 91) admits that revealed preference theory is specifically
designed for the modeling of consumer’s behavior. However, with regard to
‘questions of normative policy,’ he concedes that the ‘utilitarian, ethical, and
welfare connotations of the Bentham, Sidgwick, Edgeworth variety’ may still
deserve consideration.
1.3
Preference orderings and social choice
After the ‘subjectivist revolution’ had taken place, many economists found
themselves in an ambivalent situation: on the one hand, from its very beginnings, economics or, at that time, political economy was established and
advanced as a means not only to explain the economic world as it is or to
forecast the future course of economic events, but also to judge which one
out of several alternatives concerning the fundamentals of economic development may be preferable with regard to social welfare and, accordingly, to
give political advice. On the other hand, implicit and, therefore, unreflective
use of strong normative assumptions in the past made many economists fear
for the status of economics as a positive science, since conclusions depended
on the social values held by the respective investigator and were accepted as
valid only among those who shared these values. It is evident that both arguments, pushed to their extreme, could easily impair the reputation of
economics because its conclusions could be regarded as either irrelevant or
as arbitrary. This conflict between the positivist and the political stance in
economics was clearly recognized by a series of economists headed by Abba
Lerner (1934), John Hicks (1939), and Nicholas Kaldor (1939). With regard to
Introduction 13
welfare economics, they acknowledged Robbins’s (1932, 1938) rejection of
interpersonal comparison of well-being – and particularly the approach adopted
by Pigou (1920) – but to them it was also evident that welfare economics, lacking
any normative assumption as to the aggregation of individual welfare was
doomed to failure. Instead, a much weaker assumption was to be adopted:
according to the (weak) Pareto criterion, a situation is judged socially superior to an
alternative situation if all individuals prefer the former situation to the latter. In
its stronger form, the Pareto criterion assigns superiority if at least one individual
reveals strict preference while all others are indifferent. Unfortunately, there are
only a few situations which can be judged by the Pareto criterion alone: the
voluntary exchange of goods, for instance, is usually regarded as leading to a
superior situation. In general, all kinds of coordination problems can be solved
by the Pareto criterion. In the majority of cases, however, improvements for
some people are accompanied by deterioration for others. Left to itself, therefore,
the Pareto criterion provides only a little help in guiding actual economic policy.
One way to overcome this insufficiency without a need for utility comparisons
was the introduction of compensation tests (Hicks 1939; Kaldor 1939; Scitovsky
1941; Little 1950; Samuelson 1950): if the gainers could compensate the losers
and there was still a net benefit left for the gainers, the new situation was to be
judged as superior. Indeed, compensation can facilitate the judgment if it actually
takes place since, in this case, the resulting situation can be judged directly by
means of the Pareto criterion alone – the compensation test becoming irrelevant.
However, if the compensation test asks only for hypothetical compensation, that is,
if compensation is actually not paid, a problem of consistency arises: since it is
not clear how, in terms of welfare, the effect of the loss to the loser relates to the
effect of the gain to the winner, it is not evident whether there is any net benefit
left that could give rise to a judgment of the situation as superior in terms of
Pareto.
Another, more general, approach to the analysis of social welfare without
using an interpersonal utility comparison is the introduction of a social welfare
function by Abram Bergson (1938) and Samuelson (1947). The analysis starts with
the description of an initial social state in terms of, for instance, sets of
commodities and productive services available to each person living in this
economy. After certain economically relevant processes like productive transformation or barter have taken place, the final social state is determined in terms of
the same sets of commodities and services available to everybody. While, of
course, it would be expected that each individual is able to express her own preference for one state over the other, certain normative assumptions are required
to derive a social ordering with regard to the same, initial and final, states. Among
such assumptions could be, again, the Pareto criterion (see Samuelson 1947: ch.
8). Basically, interpersonal comparability could also be assumed, but due to the
reasons mentioned above, this is not done. Since the social preference of one
state over another may also be expressed as higher as compared to lower social
welfare, it is basically possible to assign to each of the two states a real value that
is a function of all variables constituting the respective states – therefore, it is
14
An Evolutionary approach to social welfare
called a social welfare function. It is important to note, however, that the relation
between any two of these values cannot be but of an ordinal nature.
Since the social welfare function of the Bergson or Samuelson kind represents
a simple preference ordering relating to each other two states, the initial and the
final state, as derived from all individuals’ preferences concerning these two
states (= profile), it deals with ‘single-profile’ problems. Now, it has been known
for more than two centuries (Condorcet 1785) that many methods of combining
individual preference orderings into a social preference ordering can lead to
inconsistencies if the orderings relate to each other by more than two states, that is,
if one is dealing with a ‘multiple-profile’ problem. In one of the most simple
cases known as ‘paradox of votin,g’ the attempt by three people trying to derive
a social preference ordering over three states from their individual preference
orderings by means of the majority rule leads to intransitivity. The failure of
their attempt to reach a social preference ordering is basically due to the lack of
inter-profile consistency. In 1951 Kenneth Arrow could demonstrate that this
problem of inconsistency is a general problem arising in social choices involving
multiple-profile preference orderings. Although he imposed a set of rather weak
assumptions which, he believed, any reasonable social welfare function (Arrow
reintroduced this term for multiple-profile social preference orderings) could be
expected to satisfy, his ‘impossibility theorem’ – or more formally, ‘General
Possibility Theorem’ – showed that it is logically impossible for any social welfare
function to satisfy all these conditions simultaneously and still remain meaningful, that is, avoid intransitivity and maintain completeness. Two of the conditions
refer specifically to the way that individual preference orderings influence the
social welfare function: the weak version of the Pareto criterion (condition P)
requires that unanimous strict individual preference over a pair of alternative
states must be reflected in the same strict social preference over that pair; in a
similar vein, the condition of non-dictatorship (condition D) requires that no single
individual should be allowed to become decisive for the social welfare function,
that is, no individual’s preference over two states should give rise to the same
social preference over these states, no matter what the other individuals prefer.
At least in Western societies, the latter two premises are quite indisputable. The
other two conditions are more interesting since they are not only less easily
adopted but since, moreover, they are related to one of the core issues discussed
in this work: does a social welfare function exist and, if it does, how is it
constructed? The condition of independence of irrelevant alternatives (condition I)
specifically refers to the multiple-profile character of the social welfare function:
it requires that the social ranking of alternatives from any subset of social states
must remain the same so long as the individual preferences over this subset
remain unchanged, even if the individual preferences may undergo revision once
alternative states from different subsets were included. With regard to this condition, two aspects have to be distinguished: the ‘irrelevance’ aspect refers to the
possibility that two alternatives may change their relation due to the presence or
absence of a third alternative. At least logically, the exclusion of such effects is
indeed a very plausible assumption.4 The ‘orderings only’ aspect refers to the
Introduction 15
possibility that anything other than the mere individual ordering of preferences
could become effective with regard to the social welfare function – for instance,
preference intensities. In this case two states which are identical with regard to
individual ordinal preference orderings could yield different social welfare functions simply due to the fact that the relative intensities are different in both states
(Sen 1970: 89–91). The last condition, that of unrestricted domain (condition U),
demands that, in principle, all existing profiles can adopt any logically possible
form, that is, individual preferences do not interact, or are otherwise influenced,
in such a way that certain preferences or combinations thereof are systematically
precluded (see Sen 1987: 382f).
The impact of Arrow’s impossibility theorem was tremendous. While, essentially, Bergson and Samuelson had looked for the weakest possible normative
assumption that just allowed them to derive a social welfare function and had
found the Pareto criterion as a possible candidate, Arrow’s theorem asserted that
‘if the individual orderings are interpreted as utility rankings of individuals, and
social preferences interpreted as a judgement of social welfare, […] there is no
way of combining individual utility orderings into an overall social welfare judgement satisfying the four specified conditions [including, again, the Pareto
criterion]’ (Sen 1987: 383; emphasis added). This is a negative result only at first
sight. At second sight, Arrow’s impossibility result revealed the ‘unviability’ of
the kind of welfare economics that had been advanced by Bergson and
Samuelson after rejection of interpersonal comparisons of well-being. Moreover,
the axiomatic method introduced by Arrow not only forced its users to make all
their (normative) assumptions explicit; due to its formal nature, it also allowed for
a conveying and analyzing of even subtle differences of meaning much more
accurately. Finally, Arrow’s theorem was the seminal contribution to a new field
of research – social choice theory – that, in one way or another, tried to show how
the set of assumptions had to be modified in order to resolve – or to re-establish
– the impossibility result (see e.g. Sen 1987 for a review).
In the following, I will inspect mainly those potential detours around Arrow’s
theorem that are related to the problems of cardinality and of interpersonal
comparison – the presumed core issues of any theory of social welfare. The first
approach to sidestep the impossibility result was already suggested in Arrow’s
(1951) original work: the condition of unrestricted domain on which, among
others, the impossibility theorem relies implies the fundamental independence of
the preference orderings of different persons. While, with regard to the interpersonal variability of potential preferences, this is indeed the weakest possible
assumption, it does not necessarily account for reality. ‘Single-peakedness’ is one
specific restriction of individual preferences that had been previously investigated
by Duncan Black (1948): if a series of alternatives is arranged in a line, singlepeakedness requires that for any one individual, preferences over this series either
increase monotonically, decrease monotonically, or increase to a maximum and
then fall (but do not fall to a minimum and then increase). Arrow (1951) showed
that if the preference orderings of all individuals are single-peaked and their
number is odd, majority voting will yield a transitive social ordering. While this
16
An Evolutionary approach to social welfare
specification of single-peakedness may give rise to some objections (see Feldman
1980: ch. 9), further generalization makes it appear quite reasonable: singlepeakedness over triple alternatives can be shown to be equivalent to a state in
which one alternative is regarded as not the worst by every individual. The same
is true for any agreement that a specific alternative is not the best or not in
between. Since for any group of persons such voting pattern seems to represent
a kind of common group value, this condition is called ‘value restriction’ (see Sen
1966). This generalization also works for an even number of voters if the request
for full transitivity of social preference is relaxed to the request for absence of
preference cycles and for the existence of a majority-winning alternative (Sen
1969).
Another route to overcome the negative implications of Arrow’s theorem
refers to the orderings only aspect of condition I and is, to some extent, related to
Pigou’s approach to welfare economics: if utility was cardinally measurable and
if a generally accepted mode for its aggregation could be established, it would be
quite easy to determine the relative position of all alternative states within a
social preference ordering. Of course, cardinalization as based on utility levels
had been rejected in the course of the subjectivist revolution (see section 1.2);
however, this mainly happened due to the lack of reliable methods of acquiring
objective data. This gap between the need for cardinal welfare measures as a(n
assumed) means to the resolution of Arrow’s theorem and the scepticism related
to the assessment of the respective intrapersonal processes eventually gave rise to
two new approaches to cardinalization: the more direct approach rooted in the
work of Borda (1781) and Edgeworth (1881), and further developed more
recently by Yew-Kwang Ng (1983), makes use of the finiteness of discrimination
between sensations related to well-being, while the approach of John von
Neumann and Oskar Morgenstern (1944) more indirectly allows for the composition of a cardinal utility measure by summing up the expected utilities of
alternative states or goods.5 While these approaches will be discussed more
extensively later (in section 6.1), they are mentioned here since they raised the
question as to how cardinality and interpersonal comparison could be studied in
the structure provided by social choice theory. Collective choice rules such as
social choice functions or social decision functions do not allow for any utility
information finer than that of non-comparable individual orderings. To allow
for the use of more utility information, Amartya Sen (1970: ch. 8) introduced
what he calls ‘social welfare functionals.’ Unlike social welfare functions which are
a means for the aggregation of individual preference orderings, social welfare functionals allow for deriving one social preference ordering from a set of individual
utility functions. Thereby, neither measurability nor interpersonal comparability
have to be complete; to which degree they may actually enter the analysis
depends on the respective specification of the invariance requirements. For
instance, if it is to be assumed that utility differences, but not total utilities, are
measurable, the invariance requirement defines that the utility function is unique
up to a positive affine (loosely called: linear) transformation.6 Using this analytical
device, Arrow’s impossibility theorem can readily be expressed in terms of social
Introduction 17
welfare functionals with ordinal non-comparability. Moreover, Sen (1970: ch. 8)
was able to generalize this result to the case of cardinal non-comparability. As a
consequence, the lack of interpersonal comparability gives rise to the impossibility result even if individual utilities are cardinally measurable. Conversely,
supposing interpersonal comparability allows for resolving the Arrow dilemma
even when only ordinal utility measurement is assumed (Sen 1977; see also Sen
1987: 387). Thus, by inclusion of richer information referring to interpersonal
comparison, social choice theory had eventually become able to determine
conditions that allowed for overcoming Arrow’s impossibility result. However,
being formal in nature, these results did not substantially address the question of
empirical content. Although the axiomatic structure underlying the analyses
could account for some aspects of interpersonal relations relevant for the assessment of social preferences, it was still unclear how social welfare functions are
actually derived.
1.4
Justice, empathy, and the ‘veil of ignorance’
To approach the problem of actual social decision-making, the reader is asked to
imagine a group or a society that is pursuing the task of choosing between two
alternatives states or events. According to a belief widely shared in Western societies, the task should be rather easy if all members of the group or, more
specifically, all people affected by the choice agree about the superiority of one
alternative with regard to the other. Making the standard economic assumption
that people’s individual preferences are revealed by their respective choices and
that the former reflect relative well-being with respect to the alternatives, the
preferred alternative may be called Pareto-superior. Unfortunately, in the
majority of economically relevant cases, one alternative that is to replace
another will leave some people worse off even if most people are served in a
beneficial way. Therefore, the applicability of the Pareto criterion is severely
limited. To make things even worse, a series of empirical findings even seem to
contradict the general validity of this criterion.
A prominent example for this is a person’s unwillingness to join in voluntary
exchange although in principle this exchange would allow for a betterment of both
parties with regard to the goods to be exchanged. Closer inspection reveals that the
surpluses realizable through exchange, though positive, are distributed very
unevenly. As a consequence, the person benefiting less may feel exploited and
rejects the other person’s offer. We face a similar situation when looking at some
results of experimental game theory: in the ultimatum game one of two players
receives a given amount of money which she has to share with the other person.
While she is allowed to decide about the ratio of distribution at will, the other
person can accept the offer or she can reject it, in which case none of the players
receives anything. Given rational (payoff-maximizing) agents as assumed by
neoclassical economics, any distribution yielding positive shares, no matter how
uneven, should be acceptable for all persons on the basis of the Pareto criterion. In
reality, however, small shares are usually rejected; on average acceptable offers
18
An Evolutionary approach to social welfare
comprise at least one-third of the total payoff (Güth 1995). The interpretation of
the outcome of such evidence in the standard neoclassical framework remains
notoriously unsatisfactory: while even very uneven distributions should render
both parties better off in terms of payoffs, revealed preferences imply that this is
not the case. It is possible to resolve this apparent contradiction by the application
of a utility concept that includes factors other than mere payoff. This, however,
requires a satisfaction-oriented material concept of utility as the driving force of
human action rather than a utility concept that relates to mere payoff maximization.
Another example relates to competition, innovation, and entrepreneurship as
the fundamental prerequisites for economic progress and increasing welfare.
While the benefit for the economy as a whole is evident, for many individuals
competition increases well-being only in the long run. As Witt (1996a) points out,
in the short run, the (temporary) competitive advantage of one entrepreneur
usually induces a corresponding disadvantage not only for her competitors. Each
product innovation devalues existing goods and, similarly, each process innovation obliterates existing machinery. While this process of ‘creative destruction’
(Schumpeter 1942) may allow the innovator to expand her market share and to
serve the needs and wants of consumers more efficiently, it causes considerable
costs on the part of the competitor eventually forced to shut down her firm, on
the part of workers becoming unemployed and, finally, on the part of the
consumers drawing less happiness from the goods they already possess. With
regard to the Pareto criterion, the resulting situation could be judged superior
only if all disadvantages were compensated for by the beneficiaries. This would
either render some innovations unprofitable immediately or, at least, it would
substantially increase uncertainty concerning the actual consequences of most
innovations and, thus, decrease the probability of their introduction. As a result
economic growth would slow down considerably. Interpreted in this way the
Pareto criterion implies economic actors that are completely risk-averse.
However, historical and present evidence suggests that indeed people are ready
to accept certain risks if they believe that this increases the overall probability to
improve their lot. This readiness can be further increased by the introduction of
a social security and health care system that absorbs at least the most existential
threats to individual and social integrity (see Witt 1996a: 121). Since the beginning of the Industrial Revolution such institutional arrangements have been set
up in most industrial countries: they usually mitigate the consequences of unemployment, sickness and accidents for an employee and her family, while the costs
to be contributed by the employers are kept low and, above all, fairly predictable
such that they do not reduce by too much the entrepreneur’s incentives to
continue her business. Obviously, people are ready to accept institutional
arrangements making them better off in the long run even when facing the
possibility of temporary losses in the short run. Sometimes even the vague hope
for a substantial improvement with regard to well-being suffices to render acceptable unfavorable conditions over long periods of time. In these contexts, the
Pareto criterion is of no use since it does not allow for a weighing of long-run
Introduction 19
average advantages realized by all members of the community as opposed to the
costs occasionally, or even permanently, incurred by some individuals.
Nevertheless, in all cases in which a variety of people may mutually affect each
other’s well-being in positive but also in negative ways, most societies and their
members have developed ways of judging whether they consider a given situation or process to be acceptable or unacceptable. In most cases the
corresponding decisions of the vast majority of people are not the exclusive
result of rational calculus with regard to narrow self-interest but rather they are
based on intuitive value judgments referring to fairness – that is, on an individual
manifestation of justice.
Justice is any principle widely accepted within a group of people that allows
for the resolution of potential conflicts between the interests of the members of
that group. Basically, conflicts of interest are quite a typical subject of economic
analysis since scarcity of resources is a general assumption. While this subject is
systematically excluded from analysis in those branches of economics where the
initial endowment is assumed to be given, it is of crucial relevance whenever the
causes for specific endowments play a role. For illustration, I will return to experimental game theory: in the ultimatum game, the player in charge of accepting
or rejecting the other player’s offer will not just value her own payoff. Rather, she
will compare the two players’ payoffs and relate them to potential claims these
players may legitimately have. Since in this case, both claims are more or less
equivalent she may not be willing to accept very unequal payoffs.7 Moreover, the
player expected to offer a share, though having the right to make any offer, will
probably anticipate and account for the other player’s attitudes towards different
payoffs and make the (minimum) offer she expects to be acceptable. Beyond this
rather basic argument, a few important points have to be made in order to
qualify the explanation of possible outcomes of this game: the fact that one
player is allowed to propose both shares while the other can ‘only’ accept or
reject may, for some people, legitimize unequal claims which may indeed be an
explanation for the basic asymmetry in terms of payoffs. While, despite this
‘minor’ asymmetry, basic equity may be taken for granted by most of us, it must
be stressed that this is certainly not a natural outcome. Different rules exist in
other cultures as to what claims are acceptable, and in some cases no claims
except that of the strongest individual are respected.
The relevance of such claims with regard to justice becomes even more
evident in the above-mentioned case of market competition: in a capitalist
economy, the supplier with the most innovative and, therefore, best-selling products is granted the highest profit. This does not mean that the other competitors
will not do whatever they can to challenge the market leader’s position, but none
of them would fundamentally question market competition as the underlying
mechanism because it is admitted that higher or lower profits as ‘payoffs’ correlate with and are legitimized by some significant input, be it creativeness, social
competence, cleverness, or the preparedness to take some risk. Even those actually finding themselves in a rather miserable position do not necessarily perceive
their situation as hopeless; if they only work hard enough, they may consider
20
An Evolutionary approach to social welfare
themselves as having a chance to benefit from the system. But again, the latter
principle of justice is, of course, not generally accepted. It is challenged by many
other principles. Marxism, for instance, weighs the suffering of labor more
highly for legitimizing a claim than entrepreneurial merits.
In one way or another, most people tend to include the effects of their own
actions on other people in their own decision-making. But how does one person
know how another person might be affected by a given situation or process? Of
course perception is subjective and differs from individual to individual; but in a
given social environment, it does not vary at random. The members of every
community share certain beliefs, attitudes, and habits allowing everyone to form
mutual expectations with regard to each other’s behavior. This alone enables
them to successfully coordinate their behavior. Accordingly, members of the
same group tend to adopt a common scheme for the evaluation of a more or less
extended range of states and events. States and events which are in accord with
this scheme are commonly viewed as acceptable or even desirable, while
offending the scheme is considered as undesirable. The common scheme obviously forms some basis for interpersonal comparability of well-being. On the
other hand, sharing certain beliefs, attitudes, or habits implies that other beliefs,
attitudes, and traits of action are not shared. This may give rise to conflicts
between idiosyncratic interests and interests based on the shared part of behavioral determinants which manifest themselves emotionally as moral conflicts.
Conversely, a state, event, or action in accord with the common social scheme
and, thus, not giving rise to such emotional tension, would have to be judged as
just.
Although in economics justice was rarely discussed explicitly, its relevance to
economic evaluation is highly obvious. Traditionally, in welfare economics,
justice was treated as part of a bigger aim – the maximization of welfare. Since
Bentham, the normative part of this exercise which specifically referred to justice
when aggregating individual utilities was essentially based on utilitarianism, that
is, on the basic idea that everyone’s happiness counts equally. Originally, this
one-to-one relation was to be taken as a reflection of the basic humanist idea
that every human being has to be treated equally. As described in the first
section, the successive introduction of subjectivist ideas, particularly into
consumer theory, on the one hand allowed economists increasingly to account
for individual differences. Welfare economics could follow this path only to the
extent that anything related to issues of distribution, be it in terms of resources,
capabilities, or income, was considered irrelevant and, therefore, not covered by
the theory (Bergson 1938; Samuelson 1947). On the other hand, for all those
economists concerned with the more practical issues related to economic policy,
the subjectivist framework turned out to be insufficient. Arrow’s (1951) impossibility theorem made that even more clear. As a consequence, utilitarianism
continued to prevail for quite a while in the context of Pigovian welfare
economics. In 1955, John Harsanyi still tried to defend utilitarian welfare
economics by reconciling its assumptions with at least some of the subjectivist
criticism. With regard to cardinality of welfare, the above-mentioned approach
Introduction 21
of von Neumann and Morgenstern (1944) was used to substitute for mere introspection while interpersonal comparison was achieved through the assumption
that some welfare-related determinants of (psychological) expression are culturally determined and, thus, comparable on the group level.
Interestingly, however, Harsanyi referred to interpersonal comparison of wellbeing not only with regard to the satisfaction of individual preferences; he
explicitly included ‘value judgements concerning social welfare [as] a special
class of […] nonegoistic impersonal judgements of preference’ (Harsanyi 1953:
434) into this scheme. Since he was aware that a person making such a value
judgment may find herself in a moral conflict when individual and social preferences diverge, he required for this judgment:
impersonality to the highest degree [… that is,] complete ignorance of what
his own relative position […] would be within the system chosen. [… This
does not even] presuppose actual ignorance of how a certain measure under
discussion would affect one’s personal interest; [... it] only presuppose[s] that
this question is voluntarily disregarded for a moment.
(Harsanyi 1953: 434f)
This concept of impersonality as an instrument for value judgment was not
new; it was preceded by almost 200 years by Adam Smith’s (1759) ‘impartial
spectator.’ But while Adam Smith used his impartial spectator primarily to
explain the nature of conscience and of the sense of duty, for Harsanyi’s impersonality conception, voluntary disregard of actual states seemed sufficient to
achieve value judgments that account for social rather than individual preferences.
Many people found themselves dissatisfied with utilitarianism since it essentially allows for sacrificing the welfare of some to the greater welfare of others.
This explains the welcome accorded to John Rawls’s (1971) A Theory of Justice.
In order to overcome narrow self-interest and to pursue social preferences,
Rawls made people choose their moral principles in the ‘original position’ –
from behind a ‘veil of ignorance’ where they lacked all knowledge as to ‘how
the various alternatives will affect their own particular case and they are
obliged to evaluate principles solely on the basis of general considerations’
(1971: 136f). Instead, of trying to maximize overall utility, they would safeguard themselves against the worst possible outcome by seeking certain primary
goods. Primary goods are things that ‘every rational man is presumed to want’;
besides rights and liberties, they comprise opportunities, income, wealth and
self-respect. First priority is given to the ‘principle of liberty’ which insists that
each person is to have an equal right to the most extensive basic liberty
compatible with the like liberty for others. Second in lexicographical order is
the ‘difference principle’ which requires that states of affairs or events are
judged by the extent to which they further the supply with primary goods of
the worst-off members of the society (= maximin). In contrast to widespread
interpretation, the maximin principle does not imply egalitarianism; it just rules
22
An Evolutionary approach to social welfare
out the possibility that a state or event is judged as better even though the situation of the worst-off people worsens. Together, primary goods and lexicographic
order allow for the discrimination against those kinds of pleasure that would
subject others to lesser liberty as a means of enhancing one’s own supply of
primary goods.
Like utilitarianism, Rawls’s Theory of Justice relies on major normative
assumptions which, according to Hume’s law, cannot be verified; at most, they
may be considered as reasonable in the sense that the basic principles are
soundly derived from the original contract situation and show mutual consistency. One major line of criticism of Rawls’s theory refers to the primacy of
individual freedom: it is doubted whether indeed many people would sacrifice
considerable quantities of other primary goods just to maintain the maximum
level of liberty. Another line of criticism relates to people’s assumed attitude
towards risk: the maximin principle required the vast majority to forgo very great
benefits if, for some reason, this would require some loss (no matter how trivial)
to the worst-off members of society. Assuming extreme risk-aversion, maximin
indeed excludes the possibility that the parties to the original contract would
choose to maximize average utility. True, it is said, each individual making such a
choice would have to accept the possibility that she would end up with a very low
level of welfare, but that might be a risk worth running for the sake of a chance
at a very high level. Indeed, making the assumption of complete risk-aversion
without appealing to any specific psychological assumptions renders the theory
somewhat unconvincing.
It should be noted, however, that the same is true for its utilitarian counterpart which assumes agents to be (among other things) risk-neutral. Although both
Rawlsians and utilitarians claim that it is just their specific principles which can
be seen from behind the veil of ignorance, it must be clear that all these principles are in no way based on empirical grounds; instead, they represent mere
convictions. We all know from personal experience that what we see from behind
our veil of ignorance or what we are told by our ‘man within’ is of course not
unrelated to what other people see or hear. Instead, this relatedness constitutes the
basis for at least some degree of mutual understanding, for the rise of coordination and cooperation, and, last but not least, for the interpersonal comparison of
well-being. However, humans also live in a wide variety of circumstances; they
are affiliated with quite different groups, and they differ by their very nature. All
this additionally influences how situations or events are assessed by different
people when situated in the original position. From this it would appear that in
actual life, a wide variety of normative principles is held by different groups,
communities, or societies. Compared to this, the number of principles normative
ethicists found worthy of discussion is small. Nevertheless, agreements as to
which principles are acceptable seem to be restricted to certain cultural backgrounds or to certain ideological movements. According to Hume’s law, it is
impossible to derive normative statements from facts. In order to judge one
specific value as good or another one as bad, a more basic value is needed. It
may be doubted, however, that – in philosophy, but even more so in reality – it
Introduction 23
will ever be possible to reduce all existing value judgments to one (set of) fundamental principle(s). And even if this happened, no human being would be
capable of judging on objective grounds whether this fundamental value was
good or bad, and whether or not it was suitably adopted as the basic unit for the
aggregation of social welfare. For this to happen, we all would have to believe in
(the same) transcendent instance – the ultimate argument would remain inaccessible to scientific analysis.
On the other hand, closer inspection of at least the more basic normative
principles underlying the cultures we are familiar with reveals that in many cases,
referring to a supernatural figure may not be necessary for an understanding of
these principles. Consider, for instance, Kant’s categorical imperative or the ten
commandments from the Old Testament. It is evident that rules like these essentially
enable the members of the society holding them to live together without wasting
too much effort and too many resources in conflicts that would easily arise otherwise. The positive effect of the latter rules on individual well-being, though to
some extent subjective, is a real experience and so is the existence of common
knowledge, common beliefs, and common convictions that ultimately give rise to
these rules. As a consequence, it should basically be possible to study by means of
scientific methods if not the actual content then the functional principles of
normative principles: their adoption by the individual, their maintenance and
change within the society, and finally their effects on the structure of the group
and on individual well-being.
1.5
A positive theory of social welfare
The existence of a wide variety of different normative principles in various
cultures and the fact that essentially the social environment determines which
principles a person is going to employ implies that normative principles are not
innate but acquired. The implications of this are twofold: first, normative principles are subject to change not only in the very long run. This empirically verified
fact has to find its explanation in the theory to be developed. Second, the existence of moral conflicts and their emotional manifestation makes clear that the
adoption of and compliance with normative principles is not a trivial process.
Therefore, in the first major part of this work, human behavior and learning in
general and the effect of normative principles on individual action in particular
will be studied from the evolutionary perspective. Learning can take different
forms but only the specific interaction of some of these forms will give rise to the
beneficial effect of norm-guided, particularly moral, behavior. In Chapter 2,
therefore, an overview will be given over the basic theories of learning as they
have been elaborated in different fields of psychology. In order to account for the
specific dynamics of change of normative principles and to form the basis for a
subsequent development of the interrelation between different, otherwise unrelated, mechanisms of learning, the Darwinian theory of natural evolution will be
applied to behavior – especially learned behavior. It will become evident what
crucial role is played by learning in terms of behavioral plasticity and, thus,
24
An Evolutionary approach to social welfare
improved adaptability. While Chapter 2 will basically answer the question as to
how behavior changes in response to variable circumstances, Chapter 3 will
explore the driving forces making any organism behave and, eventually, learn in the
first place. It will be shown that motivating forces form a kind of hierarchy: while
the basic level is constituted by genetically determined needs, the subsequent
levels are based on different forms of learning. Within this hierarchy, different
levels form an instrumental relationship with the higher levels representing the
means for the ends given by the respectively lower levels. Simultaneously,
ascending the hierarchy changes the character of the motivating forces from
needs and wants to incentives and preferences. Another aspect of motivation –
and the most important one with regard to the social aspects of welfare – relates
to moral behavior and to the possibility of moral conflicts. Emotions will be
shown to play an important role in this context since they cause feelings that are
perceived by the individual as the obligation to do one thing or to avoid another.
Finally, the most important point to be made in a chapter devoted to the link
between motivation and welfare refers to well-being as being derived from the
satisfaction of needs or the fulfillment of desires. It will turn out here that,
contrary to (neo)utilitarian assumptions, humans do not act in order to maximize
their utility or happiness but that, conversely, aspiring to happiness makes people
act. Entering Chapter 4, the investigation of human behavior will change its
perspective towards the dynamics of formation and change on the individual
and social level. Since in an evolutionary approach genes can be employed as
behavioral determinants only on the most basic level, memes will be introduced to
account for the need of a corresponding determinant in the context of learning.
It will be shown that essentially memes, like genes, are replicators and allow for a
successive increase in adaptiveness. Due to differences with regard to mode of
transmission, to impact on an individual and social level, and to the characteristics of propagation and change, it will prove useful to distinguish between two
kinds of memes. Together with genes, these two kinds of memes form three
levels of replicators which, according to their properties and interactions, can
easily be associated with the three hierarchical levels of motivational forces characterized in Chapter 3.
It is the intermediate level that proves particularly important for the present
investigation since it relates to social norms and values as behavioral determinants and thus to normative principles and social welfare. Accordingly, the
evolution of order in social and economic contexts, the bringing about of cooperation between rational agents, and the consequences of all this for the welfare
achievable in the respective groups will be discussed in the second part of this
work. The general aim of Chapter 5 will consist of the demonstration of the
crucial role of institutions for the formation of order within an economy and of
a possible mechanism for their installation. It will be shown that institutions not
only account for the limited cognitive capacity of human agents by allowing for
the formation of expectations with regard to other people’s behavior. Rather,
institutions give rise to mutual coordination and the resulting benefits even in
those cases where the attainment of coordination would otherwise be beyond
Introduction 25
any cognitive possibilities. By contrast, the basic problem with cooperation does
not so much relate to the finding and initial installation of the respective institutions but to their enforcement and maintenance. Although mutual cooperation
would benefit everybody, the possibility of defection renders cooperation an
unreasonable strategy from the individual perspective. Moral norms and values
play a crucial role in this context since they succeed in making people join in
social cooperation without a need for major third-party enforcement. It will be
shown that, in order to become effective, moral norms and values rely on reinforcement learning or, more exactly, ‘social learning’ à la Bandura. In order to find
a consistent set of institutions giving rise to coordination and cooperation in a
series of contexts, human intellect is again considered an insufficient means.
Instead, social group selection will be proposed which not only enables a group
to overcome the defection problem but also allows for the selection of those
norms and social values forming a consistent set. While evidence is provided for
the actual existence of social group selection, it is also conceded that this mechanism is not perfect, that is, that it may give rise to some moral principles for
which an evolutionary advantage is difficult to recognize if not even absent. In
Chapter 6, norms and values as evolved by means of social group selection are
shown to play a crucial role in the constitution of individual and social welfare.
First, it is shown that social norms and values constitute the basis for any interpersonal comparison of well-being and thus for the reconstruction of social
welfare from its individual contributions. Moreover, norms and values as
constituents of individual motivation represent a kind of social target state which
most members of a society will aspire to. While giving rise to the major part of
everyone’s satisfaction and, thus, to individual well-being, social norms and
values, moreover, determine the respective group’s success in the evolutionary
competition for scarce resources and, thus, the state of welfare for the group as a
whole.
All I will have done up to this point (section 6.5) is exclusively positive. Among
other things, I will have tried to explain why people hold certain beliefs and
moral convictions, and how the latter contribute to individual and social welfare.
I shall not comment on these attitudes and the resulting behavior in terms of
what ought or ought not to happen to them. Also, should it turn out in the
course of the development of the argument that the prevalence or the disappearance of norms and values and their welfare implications follow certain
regularities, I will not consider these regularities as something valuable in themselves and, as such, as worth promoting. In case, however, the analysis presented
in this book convinces some readers that indeed the evolutionary scheme has
positive implications with regard to social welfare, I will give (in section 6.6) some
advice as to how the evolutionary mechanism in its actual imperfectness could be
rendered more effective in attaining social welfare. Since this advice, of course,
relies on a normative assumption, it will constitute the (only) normative part of
this work. The final chapter will give a conclusion.